Morgan Stanley, one of the leading banks in the USA, raised its interest rate forecasts for Türkiye. The bank cited Erdogan’s speech yesterday as the reason for this step.
Release: 12:29 – 07 September 2023 Updated:
After the Medium Term Program (MTP) was announced yesterday, Morgan Stanley, one of the leading banks in the USA, published an evaluation note today.
In the note titled “OVP: More tightening is coming” signed by the two economists of the bank, Hande Küçük and Alina Slyusarchuk, new interest rate forecasts were also included.
Morgan Stanley raised its Central Bank (CBRT) policy rate expectation from 30 percent for the end of 2023 to 35 percent.
The Bank expects the CBRT to increase interest rates by 500 basis points at its September meeting and by 250 basis points each in October and November meetings, so that real interest rates will p into the positive zone at the end of 2023, according to the end-2024 inflation expectation of 33 percent.
The Bank expects the CBRT to increase the policy rate to 40 percent after the elections in March 2024.
THEY MADE ERDOĞAN’S EXPLANATION
The Bank cited the political support for tight monetary policy, the strong emphasis on fighting inflation in the MTP, and the upside risks on inflation forecasts included in the MTP as reasons for raising its interest rate forecasts.
Drawing attention to Erdogan’s statement at the MTP meeting yesterday, economists pointed out that this statement “reflects stronger political support for the tight monetary policy.”
In his speech at the meeting where the OVP was announced yesterday, Erdogan put forward the exact opposite of the thesis that “interest is the cause of inflation is the result” and said, “With the support of the tight monetary policy, we will reduce inflation to single digits and improve the current account balance.”
Morgan Stanley economists, pointing out that Erdogan also expressed his goal of returning from currency-protected deposits (KKM) to TL deposits yesterday, stated that this statement also supports the estimation of higher interest rates for 2024.
Erdogan also said in his speech yesterday, “We will pave the way for our Currency Protected Deposits to be converted into Turkish lira deposits on a ground where exchange rate stability is consolidated.”
RANKED THE RISKS
The bank’s report also stated that there are upside risks in inflation due to possible increase in public expenditures due to earthquake and local elections, and this poses an upside risk to interest rate forecasts. They also stated that there will be a downside risk to their interest rate forecasts, and that these two risks balance each other.
In their notes two days ago, Morgan Stanley economists stated that there are upside risks to interest rate forecasts after the strong second-quarter growth and August inflation data and the continued high foreign trade deficit data.
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